On Wednesday, Oct. 29, the Appellate Division in Brooklyn, for the first time, ruled that the forfeiture of interest and attorney fees is an appropriate sanction for banks that fail to honor their statutory obligation to negotiate in good faith with homeowners facing foreclosure.

The Second Department’s unsigned unanimous decision in U.S. Bank N.A. v. Williams, 2014 NY Slip Op 07349, is the first from any appeals court in the state to approve a penalty for a bank’s failure to negotiate in good faith at mandatory settlement conferences. The conferences were first required in 2008 in the wake of the nation’s economic meltdown. Civil Practice Law and Rules Section 3408 was amended a year later to require banks to conduct their negotiations in good faith. The new section added in 2009—3408(f)— did not specify a remedy for a bank’s failure to negotiate in good faith.

Undeterred by a clear-cut remedy, the banks’ handling of the settlement conferences has been problematic. In the last two years, 30 judges throughout the state have found banks to have failed to negotiate in good faith, often finding that the negotiations have stretched out for a year or longer or that loan reductions were approved only to later be withdrawn or that banks often either lost homeowners’ documents or required that they be resubmitted because they had grown outdated as the negotiations had dragged on.

Another measure of the depth of problems New York homeowners have encountered is found in a motion the New York State Attorney General’s Office has pending to force Wells Fargo Bank to comply with processing deadlines for mortgage-relief applications set in a 2010 nationwide settlement. The Attorney General’s motion in U.S.A. v. Bank of America, 12-cv-361 (District of Columbia) cited 200 instances in which Wells Fargo had failed to meet the settlement’s processing deadlines in cases involving 97 New York families.

The facts in the Second Department’s case were quite typical of those cited in prior “bad faith” findings and the Attorney General’s motion. Homeowner Fay Williams attended 10 conference sessions that had stretched out for more than year before Referee Deborah Goldstein, who supervised the conference process. Ultimately, Goldstein recommended that U.S. Bank N.A. be found not to have negotiated in good faith and that sanctions be imposed.

Williams’ case was also typical in that her mortgage is now owned by a syndicate, which has formed a mortgage pool as security for bonds it had issued to raise capital. In the 30 bad faith cases surveyed,[1] often the holder of the mortgage was a syndicate like U.S. Bank. As was typical in those rulings, U.S. Bank waited until negotiations had sputtered for 13 months before advising either the homeowner or the referee that the legal documents forming the pool precluded it from altering either the interest or duration of the mortgages it owns.

In their ruling, the four Second Department judges dryly stated that, under those circumstances— which were reflected in many of the “bad faith” rulings—Brooklyn Justice Richard Velasquez “providently exercised” his discretion in requiring the syndicate to forfeit interest and attorney fees, which it would otherwise have been entitled to.

The panel—which consisted of Peter B. Skelos, Sheri S. Roman, Sylvia O. Hinds-Radix and Hector D. LaSalle—also refined Velasquez’ order and directed that fees and interest be tolled from the date of the initial conference in June, 2010 until the conferences resume under the panel’s mandate. That reflects a period, which has already extended for more than four years.

Prior to the posting of this article, Pamela Ann-Marie Walker, the attorney who handled Williams’ case at the conference and trial levels through the Brooklyn Bar Association’s Volunteer Lawyers Project, was unable to provide an estimate of how much interest is currently at stake under the panel’s tolling order.

In the last two years, the Second Department has been edging toward the approval of a remedy for good faith violations. In 2013, a panel in the case of Wells Fargo Bank v. Meyers, 108 A.D.3d 9, approved the notion that judges have the authority to approve a remedy, just not the one ordered by the trial judge in that case (the trial judge’s order had required specific performance of a trial modification which the bank had subsequently withdrawn). The Court in Meyers held off endorsing any specific remedy but it listed a number of possibilities.

In July of this year, another panel in U.S. Bank v. Sarmiento, 2014 NY Slip Op 05533, let a order tolling interest and fees stand even though it expressly stated that a legal technicality prohibited it from deciding whether judges have the power to order tolling.

The length of the delay attributable to the bank’s bad faith and the amount of the mortgage debt in Sarmiento is roughly analogous to that in the Williams case. A. David Fuster, who represented the homeowner in Sarmiento, was quoted in the New York Law Journal (Aug. 4, 2014) as estimating that the tolled interest for his client amounted to approximately $300,000.